Unreported employment, colloquially called working under the table, nixers being paid cash-in-hand or moonlighting (in U.K. English), is employment not reported to the state. This is often done by the employer or the employee for tax evasion or circumvention and non-compliance with other laws. Unreported employment is a part of what has been called the underground economy or non-observed economy.
Workers and employers who engage in this practice generally make and receive payments in cash, and the employer often does not check the employee's background or credentials, as is sometimes required by law or otherwise expected by the industry's client base, such as a license or professional certification. While the hiring of the employee may or may not be legal in itself, it is often done when the employer or the employee is intentionally failing to obey one or more laws.
In developed nations unreported employment circumvents withholding tax and is part of the informal sector. This is hidden from the state for tax, social security or labour law purposes but is legal in all other aspects.
Common types of jobs that are paid cash-in-hand include:
- Domestic work, such as housekeeping, babysitting, or foodservice
- Construction work or farm work
- Taxicab service (sometimes known as hacking)
- Various types of self-employment, such as plumbing, window cleaning, painting and decorating, street market trading and gardening
- Short-term work and day laborers
- Short-term youth employment
- Barbacking and restaurant work.
- Fixing cars, motorcycles and mopeds
Reasons one may work or pay a worker cash-in-hand include:
- Avoidance of wage garnishment or payment of child support or alimony
- Cheaper labor or avoidance of minimum wage laws
- Convenience for both parties
- Elimination of paperwork, bookkeeping, and regulation compliance
- Reduced/eliminated expenses or need for bookkeepers, human resource specialists, lawyers, accountants, payroll services, insurance agents and other employment specialists
- Not having to check or show a criminal record
- Protestation of actions or policies of the governing authorities (see agorism)
- Evasion of insurance requirements
- Flexibility in hiring short-term employees without excessive overhead or paperwork
- Avoidance of exceeding allowable income by a person receiving certain benefits, such as unemployment, disability, or public assistance
- Fugitive, illegal immigration, organized crime
- Tax noncompliance, tax resistance, social security evasion
- In order to continue claiming Unemployment or disability benefits fraudulently.
- Ability to hire qualified but disliked ethnic people and blacklisted people, and the ability for those people to hire others.
Harm caused by unreported employment
Unreported employment can have harmful effects on a government, and can negatively impact employers and employees. Unreported employment directly affects the government's ability to fund resources (government spending) by creating a tax gap. This refers to the loss of tax revenue a government makes due to unreported income.
A 2005 University of California, Los Angeles study showed that a then-particularly weak economy in the U.S. state of California was the result of more than two million workers who were receiving their pay off the books without paying taxes.
Those who are employed under the table, including illegal immigrants, may be denied rights that legally employed workers have, such as minimum wage, various benefits (particularly unemployment benefits), and fair treatment.
Under-the-table employees who lose their jobs may not be entitled to collect unemployment benefits. They have limited causes of action against their employers for issues such as mistreatment, on-the-job work accidents or lack of payment. Employers have limited cause of actions against employees who commit crimes such as embezzlement, theft, or abuse of employer.
In sectors where such practices are widespread legitimate businesses may be undercut by (and have difficultly competing with) those who employ staff illegally.
Government revenue agencies look for lifestyles not inline with the income reported. They possess tools that aid in assessing unreported taxes which can result in large fines or jail time for the employer.
Beneficial unreported employment
Many new entrepreneurs make their first part-time hires under-the-table. The complexity of employment regulations and large amount of paperwork can be daunting to a new entrepreneur, especially when they only need someone for a few hours a week. Some contend that this under-ground, early-stage employment is a vital step in the growth of a healthy above-ground economy.
Day laborers play an important role in some segments of the construction and landscape industries. They fill an immediate gap in labor shortages. Background checks, identification, required paperwork, and government filings for a single day's work is prohibitive, so of necessity, day laborers become part of the underground economy and their employment is rarely if ever reported.
A large amount of micro employment (work that is only performed for a day or two) is done under-the-table. Although nanny laws make allowances for micro employment (a baby sitter, or lawn mowing) for the homeowner, businesses are typically required to fill out and file several hours worth of paperwork even for an hours worth of work. The dollar amounts are too small for tax collecting agencies to pursue and the paper work too arduous to file, so legitimate micro-employment among businesses is rare. However, micro employment is an important resource for many small businesses.
In professional fields like Architecture, or Marketing, moonlighting is the typical first-step to starting a legitimate 'above-ground' business. Again, filing paperwork and compliance and knowledge of labor laws are prohibitive for the small amount of work performed. Although illegal, the small revenue stream generated by these side-businesses are rarely pursued by tax enforcers. As side-work increases, a professional employee is able to leave their employer and become independent. At this point, paperwork is usually filed and self-employment taxes reported. This business then becomes a legitimate and beneficial part of the 'above-ground' economy.
Those who are unlikely to find employment through the 'above ground' economy including those with past criminal records (or current warrants) and undocumented workers can be reasonably productive and self-sufficient thereby keeping them from engaging in less desirable activities like theft and drug-use.
Self-employment in cottage industries is often unreported at first. A home-cook for example, may sell a few pies to friends and co-workers without filing necessary sales taxes or self-employment taxes. Although technically illegal (usually), this may lead to a legitimate and beneficial business and is often how small businesses are started. In some countries the tax system attempts to recognize this and for some taxes sets minimum thresholds on the amounts liable. However, there is still the burden of compliance with the bookkeeping requirements in order to prove that one is exempt.
Short-term youth employment is often unreported but very beneficial. A teenager hired to aid in constructing a shed or barn, for example, teaches him/her valuable skills and responsibility. Most youth would not be employed for short-term projects if employment had to be reported. Government revenue collectors typically ignore enforcement of this form of beneficial, unreported employment. Youth-run lemonade stands that have been shut down by police for example, have received an enormous amount of bad press and public out-cry.
Although controversial, some argue that because illegal immigrants are unable or unlikely to take advantage of unemployment, welfare, and retirement benefits, they are less likely to be unemployed and are more likely to contribute to a productive society. This view also argues that in states that rely primarily on sales tax as revenue instead of income tax, these illegal immigrants may contribute more in government revenues than the government benefits they receive thereby creating a net positive revenue stream for the governing body.
Often when an employee is working under-the-table, both the employer and employee have agreed on this method of payment/employment. Frequently the employer is running an unreported cash-based business. These methods make detection by authorities time-consuming and difficult. Most small-scale operations take place without any real enforcement effort. Lawn-mowing is a good example of a cash-based business that is frequently unreported.
In the United States, authorities have focused enforcement resources on larger scale operations like illegal immigrants who are employed by large companies. Discovery and enforcement of smaller-scaled unreported employment is typically through a secondary indiscretion like fraud, tax irregularities, and unrelated or partially related civil/criminal violations of the employer or employee.
Although the Federal Government may arrest, prosecute, and imprison an individual for engaging in commerce without the State's approval, the high cost of such enforcement is prohibitive and is usually reserved for the most egregious cases.
- Reflections on the Meaning and Measurement of Unobserved Economies:What do we really know about the "Shadow Economy"? by Edgar L.Feige Journal of Tax Administration 2016 Vol.2 No. 1
- US Immigration and working under the table
- In U.S. English, moonlighting is working at a second job, reported or not.
- Feige, Edgar L. (2016). "The Meaning and Measurement of Unobserved Economies: What do we really know about the "Shadow Economy"?". Journal of Tax Administration (30/1).
- Feige, Edgar L. (1990). "Defining and Estimating Underground and Informal Economies: The New Institutional Economics Approach". World Development (18/7).
- Colin C. Williams (2005). A Commodified World?: Mapping the limits of capitalism. pp. 73–74.
- Feige, Edgar L. & Cebula, Richard (January 2011). "America's Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S.". Retrieved 2012-03-05.
- Feige, Edgar L. (September 2009). "New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap"". Retrieved 2012-03-05.
- Abate, Tom (24 June 2011). "Weak outlook for state seen / Many are working under the table, UCLA group says". The San Francisco Chronicle.
- Porter, Eduardo (19 June 2006). "Here Illegally, Working Hard and Paying Taxes". The New York Times.